Bill Jamieson: Naughty or nice? Prosperity depends on ‘Santa’ Derek Mackay

Finance Minister Derek Mackay could yet spring a surprise in the budget. Picture: Jane Barlow
Finance Minister Derek Mackay could yet spring a surprise in the budget. Picture: Jane Barlow
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It’s that festive time of the year again – twinkling Christmas tree lights, glowing Yule logs, the jingling bells of Santa’s reindeer… and the Scottish Government budget.

Awaited with trepidation by higher rate taxpayers this Thursday, with every year it seems to creep closer to Christmas. Soon Finance Minister Derek Mackay will be turning up in Santa Claus uniform even though his bag of presents looks woefully thin.

And no sooner will his austerity brown parcels have been unwrapped amid cries of disappointment from the public spending lobbies than the Scottish Fiscal Commission will unveil what is set to be a highly cautious and downbeat assessment of our economic and fiscal prospects for the coming year.

However, a touch of festive sparkle (of sorts) has come from that normally doleful source – the EY (aka Ernst & Young) Scottish ITEM Club – now performing as Santa’s merry elves.

Its latest economic forecast released just ahead of the Scottish budget predicts that economic growth here is expected to pick up pace and match UK performance in 2018. It sees our GDP growth rising to match the UK as a whole at 1.4 per cent – a sizable increase from the 0.8 per cent expected for 2017.

Modest though this is, what a welcome relief from the hand-wringing that has characterised economic assessments for most of the past 12 months – much of it from St Andrews House.

EY says private sector services will continue to drive growth and that Edinburgh and Glasgow will continue to power economic expansion, highlighting the need for other Scottish cities to follow suit.

After contracting in 2015 and 2016, the manufacturing sector is expected to make a positive contribution of one per cent growth in 2018 and 2019 as well as an annual average growth of 1.3 per cent during the next five years.

Household spending is to be a key driver behind the strong performance for Scotland in 2018 with growth forecast to be 1.1 per cent in real terms, an increase from 0.8 per cent in 2017. But it warns that while employment growth in Scotland in 2017 was double the UK rate (2.6 per cent compared with 1.3 per cent) the outlook for Scotland is weaker. It expects employment growth to slow to 0.4 per cent and mark time in 2019, and with subsequent growth limited to just 0.1 per cent a year to 2022. And over the next five years (2018 to 2022 inclusive) Scotland looks on course for an annual average of 1.7 per cent growth compared with two per cent for the UK as a whole.

However, the overall upbeat tone gives grounds for hope. And lest this be regarded as a lone voice, the latest UK construction sector Purchasing Managers Index (PMI) released last week showed growth at its fastest rate in five months.

The index exceeded analyst expectations, growing to 53.1 in November from 50.8, driven by an increase in housebuilding. The figures were welcomed by housebuilder Lovell, which predicts a significant step-up in the number of new homes it is able to deliver across Scotland next year.

And last Friday brought news that UK manufacturing output expanded for the sixth consecutive month in October. Official figures showed Britain’s factories notched up the longest run of expansion for at least two decades. Annual growth in factory output hit 3.9 per cent in October – the biggest increase since December 2016. Despite a relatively subdued October, Kate Davies of the Office for National Statistics said “the longer-term picture is one of strong growth”.

So much for the silver lining around the Scottish budget. Now for the clouds. The main focus on the statement this Thursday will be on Scottish Government revenue and spending – and in particular whether Mackay will follow the UK Chancellor in raising the threshold for the higher 40 per cent tax rate to £46,350 or – as widely expected – he will keep it unchanged for Scottish taxpayers at the current £43,000 level.

This would have been raised a tad to £43,430 to maintain it in real terms after adjusting for inflation. However, as part of an agreement with that benign, fair-minded and progressive force in our affairs – the Scottish Greens – even protection against inflation was to be denied, in order to generate another 
£29 million for the government to spend.

So how many will be hit if the higher rate threshold remains frozen – and by how much?

According to timely and informed research by the Scottish Parliament Information Centre (SPICe) last week, there are 365,000 higher rate taxpayers in Scotland and 21,000 additional rate taxpayers (those earning £150,000 plus) – a total of 386,000 in all.

A taxpayer with £35,000 of taxable income will pay the basic rate of income tax, reducing their take-home pay to £23,500. A taxpayer with £50,000 of taxable income will have to pay £11,500 in tax, reducing their take home pay to £38,500. An additional rate taxpayer 
on £210,000 will have a tax bill of £76,200.

It is often assumed that higher rate taxpayers constitute only a small fraction of Scotland’s taxpayers. Wakey, wakey. Changes in the taxpayer base as well as policy changes have brought about a remarkable rise in the number of those who are now liable.

While the number of basic rate taxpayers has fallen – mainly as a result of the rises in personal allowance – the number of higher and additional rate taxpayers has increased significantly since 2010-11. In Scotland the number of higher rate taxpayers has risen by 57 per cent while the number of additional rate taxpayers has almost doubled.

Estimating behavioural responses is challenging. Tim Allan, the president of the Scottish Chambers of Commerce, warned last week that widely predicted income tax rises in the Budget risked long-term damage to Scotland’s international investment profile, and warned against careering towards tax rises in the absence of independent economic impact assessments.

“Our concern is that, at a time of sluggish growth and faltering business investment, a competitive Scotland cannot afford to be associated with higher taxes than elsewhere in the UK. A high-tax Scotland would be easy to achieve but the damage could take years to repair.”

Festive cheer and jingling sleigh bells? Mackay could yet spring a surprise – but prepare for disappointment beneath the PR wrapping: this could prove a “fake news” Santa.